Smart money buys Petrolifera Petroleum and ComptonSmart money buys Petrolifera Petroleum and Compton Petroleum and sells OPTI Canada
Friday September 17, 2010
Petrolifera Petroleum (PDP.to/PRFPF.pk) Current: $.63 Target: $5.52, 776.2%
Compton Petroleum (CMT.to/CMZPF.pk) Current: $.51 Target: $3.63, 611.8%
OPTI Canada (OPC.to/OPCDF.pk) Current: $.94 Target $.41, -56.4%
This is the story of three oil and gas companies. All 3 were once the darlings of the Toronto Stock Exchange as they all had over $1 billion in market cap, once touched $20 and have spent the majority of their stock market life above $10. Now they trade less than $1 with perceived financial problems. Those problems are still founded on OPTI and their chart reflects it as the stock is a falling knife with no end in site. However, both Petrolifera and Compton have recently solved their debt problems, shooting their stock prices above the key 50-day MA resistance and turning it into their support. They are bouncing off this key support line, making it an opportune time to load up on both.
Petrolifera is an oil and gas company with operations in Argentina and significant holdings in Colombia and Peru. One of Petrolifera’s Colombian oil assets - La Pinta - has thus far been a cash drain on the company and the prime reason why there is such an opportunity to buy in at these levels. But their Brilliante Natural Gas well has gone extremely well and should be providing them with cash flow in 2011 to supplement their Argentinean production. Petrolifera is not subject to weak North American Natural Gas prices as their operations are located in areas where the Natural Gas demand/supply dynamic is a lot more favourable to producers. Remember that Natural Gas cannot be shipped as easily as other commodities so significant variances in its price throughout the world can exist. North American investors have not picked up on this point yet.
They have an exciting prospect for significant gains as they will be drilling the San Angel well on their Magdalena licence in Q4 2010. Any positive news from this well could increase the stock 10-30% in one day as similar news items have done on the stock in the past.
In lieu if their significant Colombian holdings, the key to Petrolifera’s value is their Peruvian oil block assets. They act as a holding company right now as they cannot afford to develop the blocks with their own coiffures. They are in the process of negotiating farm outs and once negotiations are complete that is when the company’s stock price will rise. Referring to the Jennings Capital report dated April 21, 2010 Petrolifera’s Peruvian assets alone could be worth $7.25 a share if they retain a mere 25% share after the farmout. The report can be found at https://www.jenningscapital.com/reports/PDP04212010BrillanteGasDiscovery.pdf. A username and password may be required to view the report.
Petrolifera has nearly tripled their share base since their glory days of 2006 so it is unlikely that it will reach $25 within the next 3 years. However, there is plenty of reason to believe $3-$5 can be reached within the next year. From November 2005 to February 2006 Petrolifera’s stock price rose from $1.70 to $13.20 as investors were rushing to get in on a piece of their South American oil and gas assets. As they are out of the media’s attention again, now is a perfect opportunity to expect a similar rise on good news of one or more of their many projects.
Petrolifera’s market cap is currently 40% of their Book Value vs. the oil and gas industry average of 260%. Their price to cash flow is a mere 3.6 to 1 vs the industry’s average of 11 to 1 so Petrolifera’s stock price would have to more than triple just to be in line with this metric, even if you ignore the massive value locked away in Peru.
Tripling their stock price to come in line with the industry’s P to CF would bring it to $1.89 and using 50% of Jennings Capital’s target valuation of their Peruvian assets would add an additional $3.63 for a total target of $5.52.
Petrolifera has warrants available trading under the symbol PDP.wt on the Toronto Stock Exchange. While the stock trades around 60 cents, the warrants trade around 15 cents, allowing for up to a 4 to 1 leverage opportunity. They expire in a year from now on August 28, 2011 at a strike price of $1.20. They are undervalued relative to other securities of similar out of the money strike prices and time frames. For those who enjoy higher risk and higher return payoffs, the warrants are an excellent choice to purchase at current prices.
Compton Petroleum had a debt problem 8 times greater than Petrolifera’s, but have recently sold one of their non-core assets and renegotiated their debt to lower their overall interest payments and extend the expiry of their bonds to 2017.
Compton’s holdings - while not as exciting as Petrolifera’s - are massive and at these prices are an excellent choice to gain exposure into the oversold North American Natural Gas market. Compton’s unreasonably low stock price is due to several factors piled up on top of each other at once. In addition to their debt issue, they recently delisted from the NYSE, keeping only their TSX listing and started trading on pink sheets in the US. Despite the move, their liquidity remains largely unaffected. Analysts have turned negative on the company and one large mutual fund dumped many shares in anticipation of the company’s debt reorganization failing and the company being forced into bankruptcy. Now that the debt issue has been solved watch for the tide to swing positive on the company as people start to focus on Compton’s tremendous value vs. its peers.
The key to Compton’s value is their fundamentals. Their Price to Book Value is 0.2x vs. the industry average of 2.6x or 13x undervalued, Price to Sales of 0.6x vs. the industry average of 3.6x or 6x undervalued and Price to Cash Flow of 2.3x vs. 11x for the industry, 4.8x undervalued. The average of the three metrics makes Compton 7.9x undervalued. 7.9x of their current price is $4.03. They are expected to lose an average of 5 cents a quarter for the next year which erodes 20 cents of their market cap. Doubling this erosion to 40 cents as a conservative estimate until Nat Gas prices recover to consistently above their breakeven point of $5 leads to a target price of $3.63.
Compton also has warrants trading on the TSX with an exercise price of $1.55 expiring on September 25, 2011. They trade at 4 cents so there’s 15x leverage opportunity. While holding the warrants close to next year’s expiry date is risky given how far out of the money they currently are, Compton’s chart suggests an imminent bullish movement to the 80 cent level where it will meet resistance from its 200-day MA. The last time it was at that level was mid-June when the warrants traded in the 7-10 cent range and they have traded over 20 cents when the stock was over $1 so they have great short-term potential.
While both Petrolifera and Compton have turned a corner in their operations, OPTI Canada is still headed on the same path. While Compton’s debt issue was 8 times larger than Petrolifera’s, OPTI’s is 4 times larger still at $2.3 billion debt as of their Q2 report with another $400M having been recently added. And unlike the other two companies, OPTI does not have a positive cash flow to pay down their debt. Their revenue is about 35% of total expenses, leading to a net loss and a net decrease in cash in excess of $150M in Q2 2010 alone as they ramp up production on their currently unprofitable Long Lake Project. OPTI’s book value is deeply discounted at 0.2x like Compton, but unlike Compton, for good reason.
OPTI has not diversified its assets like Compton and Petrolifera and depends on the Long Lake project shared with Nexen for survival. As this project has seen cost overruns and production delays, OPTI’s stock price has eroded from over $20 to less than $1. Given their high probability of having their assets seized by the bondholders at liquidation prices, a 90% discount should be applied to their book value, which would lead them to a 41 cent stock price.
Many people have lost money on OPTI Canada as its stock price has descended. A lot of them are of the buy and hold mindset or are averaging down in an attempt to breakeven. Given that Petrolifera and Compton have both seen the same lofty stock prices as OPTI, are in better shape financially and operationally, are equally as undervalued when it comes to book value and have a stock price much cheaper than OPTI at the moment, it is a great idea for those investors to switch out of OPTI into one or both of them and try to make their money back that way while they still can.